IRS Form 2553 Explained
Small businesses operating in the United States have the benefit of modifying their business structure to optimize their tax savings, such as through charitable donations and appropriate tax exemption options.
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Key Takeaways:
- IRS Form 2553, Election by a Small Business Corporation, is a tax form that allows taxpayers to register their small business as an S corporation instead of a C corporation which can impact their options for tax-exempt claims and deductions.
- To be considered eligible for S corporation status, the company must be a domestic corporation, have 100 shareholders or less, not include any non-resident shareholders, contain only one class of stock, have shareholders that are not corporate entities, and must file IRS Form 2553 accurately and on time.
- If electing a business for S corp status to come into effect in 2023, IRS Form 2553 must be filed before March 15, 2023, or at any time during the previous tax year.
What Is IRS Form 2553?
IRS Form 2553, Election by a Small Business Corporation, is a tax document that allows taxpayers to register their small business as an S corporation as opposed to a C corporation.
What Are The Similarities And Differences Between A C Corporation And An S Corporation?
Similarities
C corporations and S corporations both offer limited liability protection so that individuals, owners, or shareholders of the business are not personally responsible for the liabilities and debts of the company, nor are their personal assets at risk of being levied to collect unpaid back taxes, as they are registered as separate legal entities. C corps and S corps also both follow a similar business structure in which the shareholders own the corporation that owns the business and a board of directors is elected to manage the business affairs.
Differences:
C corporations and S corporations differ in the way they are subject to federal income taxes. C corporations file a corporate tax return using IRS Form 1120 and may be subject to double taxation. S corps are considered pass-through taxation entities and file taxes using IRS Form 1120s. Additionally, the net taxable income for S corporations is only taxed once. C corps and S corps also have different shareholder, ownership, and stock restrictions.
Eligibility Requirements For IRS Form 2553
Only certain small businesses will qualify for S corporation status. Here are some of the main requirements to be eligible for this type of business status:
- The company is a domestic corporation.
- The business has 100 shareholders or less.
- There are not any non-resident alien shareholders in the business.
- There is only one class of stock in the business.
- The shareholders in the business must not be corporate entities: only individuals, estates, and exempt organizations will qualify.
- The organization is timely in filing its IRS Form 2553.
How Often Is IRS Form 2553 Filed?
Unlike many types of IRS tax forms that must be filed annually, once a business has been approved as an S corp, the status will remain valid. Still, this form does have a specific due date within the initial tax year for the business status to come into effect.
The due date for filing IRS Form 2553 is dependent on whichever tax situation applies to the business:
- Less than 2 months and 15 days after the beginning of the specific tax year that the filer intends for the election to take effect. If an individual wants to apply for S corporation status for 2023, the filing deadline is March 15, 2023.
- At any point of the preceding tax year in which the filer intends for the election to take effect.
What To Do If You Missed The IRS Form 2553 Filing Deadline
In the case that you missed the filing deadline for IRS Form 2553 but still wish for the S corporation to come into effect for the current tax year, the good news is, it is possible that you may qualify for late filing as a relief option. In this situation, the taxpayer must be able to prove that there is a valid reason that the S corporation election form was not filed on time.
Here are the four eligibility requirements to be approved for late filing status for the 2553 tax form:
- The organization had the intention of filing taxes as an S corporation by the assigned due date.
- The sole reason that the business did not file its taxes on time was that the responsible party failed to file IRS Form 2553 by the deadline.
- There was a reasonable explanation for the corporation missing the filing deadline for IRS Form 2553.
- All of the business shareholders complied with the corporation’s desire to opt for S corp status when they declared their income, and the corporation has documentation to support this.
How To Request A Copy Of IRS Form 2553
It is beneficial for corporations to keep a copy of IRS Form 2553 in their business records for reference when it comes time to file their tax returns. If a shareholder, employer, or other individual involved with the business entity has misplaced their IRS Form 2553, they can request a copy of this tax document from the IRS by completing the following steps:
- Ensure that they have the necessary authorization to perform business dealings on behalf of the corporation.
- Contact the IRS Business and Specialty Tax Line at 1-800-829-4933, a toll-free number offering tax assistance to small businesses between 7 AM and 7 PM of the local time zone of the state the business is in.
- Request a copy of IRS Form 2553 by providing all of the necessary identification information to the IRS agent, including the business name and address, the caller’s name and role within the business entity, the Employee Identification Number (EIN) for the corporation, and the contact information for the company.
- Put the newly received copy of IRS Form 2553 with their other tax documents and business records for the purpose of referencing in the future.
The structure of your business can significantly impact the extent to which you can optimize tax-exemptions and tax-deductible options when you file taxes. If you need help filing taxes as a small business owner or wish to know which business status will result in the most tax savings for your corporation, the tax professionals at Ideal Tax are here to help with a free tax consultation.
Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.
